'''Lowe's Companies (NYSE: LOW)''' is the second largest home improvement retailer in the world and one of the top ten largest retailers in the U.S. with $47.2 billion in sales in 2009. <ref name=mainfinancial>[http://sec.gov/Archives/edgar/data/60667/000006066709000036/exhibit13.htm LOW 2008 10-K, Exhibit 13, pg. 21]</ref><ref>[http://www.stores.org/pdf/08Top100Chart.pdf Stores "2008 Top Retailers"]</ref> Lowe's offers products and services across twenty categories in their home improvement stores, ranging from kitchen appliances to [[Timber Prices|lumber]] to gardening tools. The company ranks second in home improvement retailing to [[Home Depot (HD)]], which had total sales of $66.2 billion in 2009 -- nearly one-and-a-half times that of Lowe's. <ref name=HDmainfinancial>[http://sec.gov/Archives/edgar/data/354950/000095014409002875/x17422e10vk.htm HD 2008 10-K, pg. 28]</ref> Home Depot has has held the upper hand against Lowe's since 2005 in terms of sales and net income -- in 2009, Home Depot's net income was $2.7 billion, one-and-a-half times greater than Lowe's $1.8 billion.

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'''Lowe's Companies (NYSE: LOW)''' is the second largest home improvement retailer in the world and one of the top ten largest retailers in the U.S. with $47.2 billion in sales in 2009. <ref name=mainfinancial>[[stock:Lowe LOW 2008 10-K, Exhibit 13, pg. 21]]</ref><ref>[http://www.stores.org/pdf/08Top100Chart.pdf Stores "2008 Top Retailers"]</ref> Lowe's offers products and services across twenty categories in their home improvement stores, ranging from kitchen appliances to [[Timber Prices|lumber]] to gardening tools. The company ranks second in home improvement retailing to [[Home Depot (HD)]], which had total sales of $66.2 billion in 2009 -- nearly one-and-a-half times that of Lowe's. <ref name=HDmainfinancial>[[stock:Home_Depot_%28HD%29/Filing/10-K/2009/F1301349 | HD 2008 10-K, pg. 28]]</ref> Home Depot has has held the upper hand against Lowe's since 2005 in terms of sales and net income -- in 2009, Home Depot's net income was $2.7 billion, one-and-a-half times greater than Lowe's $1.8 billion.

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Like all home improvement retailers, Lowe's is very vulnerable to [[Interest Rates|interest rates]] and the housing market slowdown. The [[Subprime lending|subprime mortgage crisis]] in the financial industry has also been a large factor behind Lowe's struggles. In 2009, even though Lowe's net sales decreased 2% from 2008 sales, net income decreased 18.8% to $1.8 billion and same store sales decreased 6.7% for the year.<ref name=mainfinancial/><ref name=comparable>[http://sec.gov/Archives/edgar/data/60667/000006066709000036/exhibit13.htm LOW 2008 10-K, Exhibit 13, pg. 5]</ref> In addition, at of the end of fiscal 2009, Lowe's operated over 1,710 stores in the United States and Canada -- all but 16 of the stores were located in the US, <ref name=stores>[http://sec.gov/Archives/edgar/data/60667/000006066709000036/lowesform10k01302009.htm#business_description LOW 2008 10-K, Part 1, pg. 5]</ref> which gives Lowe's greater exposure to the struggling domestic US market. The economic downturn has also caused the company to slow down store expansion -- Lowe's only plans to open 40 to 45 new stores in 2010 compared to the 61 and 115 stores it opened in 2009 and 2008 respectively.<ref name=stores/> Home Depot on the other hand operates 262 stores internationally and has stores in China, which act as a buffer to the domestic market. <ref>[http://sec.gov/Archives/edgar/data/354950/000095014409002875/x17422e10vk.htm HD 2008 10-K, pg. 8]</ref> Lowe's expand internationally in Q12010 by opening its first store in Mexico.<ref name=mexico>[http://www.marketwatch.com/story/lowes-opens-first-stores-in-mexico-2010-02-05 Market Watch "Lowe's Opens First Stores in Mexico" 5 February 2010]</ref>

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Like all home improvement retailers, Lowe's is very vulnerable to [[Interest Rates|interest rates]] and the housing market slowdown. The [[Subprime lending|subprime mortgage crisis]] in the financial industry has also been a large factor behind Lowe's struggles. In 2009, even though Lowe's net sales decreased 2% from 2008 sales, net income decreased 18.8% to $1.8 billion and same store sales decreased 6.7% for the year.<ref name=mainfinancial/><ref name=comparable>[[stock:Lowe LOW 2008 10-K, Exhibit 13, pg. 5]]</ref> In addition, at of the end of fiscal 2009, Lowe's operated over 1,710 stores in the United States and Canada -- all but 16 of the stores were located in the US, <ref name=stores>[[stock:Lowe %27s_Companies_%28LOW%29/Filing/10-K/2009/F1299627#part_i | LOW 2008 10-K, Part 1, pg. 5]]</ref> which gives Lowe's greater exposure to the struggling domestic US market. The economic downturn has also caused the company to slow down store expansion -- Lowe's only plans to open 40 to 45 new stores in 2010 compared to the 61 and 115 stores it opened in 2009 and 2008 respectively.<ref name=stores/> Home Depot on the other hand operates 262 stores internationally and has stores in China, which act as a buffer to the domestic market. <ref>[[stock:Home_Depot_(HD)/Filing/10-K/2009/F1301349#104 | HD 2008 10-K, pg. 8]]</ref> Lowe's expand internationally in Q12010 by opening its first store in Mexico.<ref name=mexico>[http://www.marketwatch.com/story/lowes-opens-first-stores-in-mexico-2010-02-05 Market Watch "Lowe's Opens First Stores in Mexico" 5 February 2010]</ref>

==Company Overview==

==Company Overview==

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===Stores and Products===

===Stores and Products===

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Lowe's provides a wide range of home building supplies (about 40,000 products per store) and services to its target customers. <ref name=products>[http://sec.gov/Archives/edgar/data/60667/000006066709000036/lowesform10k01302009.htm#business_description LOW 2008 10-K, Part 1, pg. 6]</ref> The company sells national brand name merchandise ranging from Whirlpool to John Deere and proprietary brands exclusive to Lowe's such as Kobalt and Harbor Breeze.

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Lowe's provides a wide range of home building supplies (about 40,000 products per store) and services to its target customers. <ref name=products>[[stock:Lowe%27s_Companies_%28LOW%29/Filing/10-K/2009/F1299627#part_i | LOW 2008 10-K, Part 1, pg. 6]]</ref> The company sells national brand name merchandise ranging from Whirlpool to John Deere and proprietary brands exclusive to Lowe's such as Kobalt and Harbor Breeze.

In 2009, the company operated 1,710 stores in the United States and Canada -- all but 16 of the stores were located in the United States. Most retail outlets are [[Superstores|big-box]] stores (averaging around 110,000 square feet of retail space) which are used in large markets, and some are smaller 94,000 square-foot stores used for smaller markets. In 2009, the company opened 61 new stores, all but 5 of which were in the United States. The company also expand internationally in Q12010 by opening its first store in Mexico. <ref name=mexico/>

In 2009, the company operated 1,710 stores in the United States and Canada -- all but 16 of the stores were located in the United States. Most retail outlets are [[Superstores|big-box]] stores (averaging around 110,000 square feet of retail space) which are used in large markets, and some are smaller 94,000 square-foot stores used for smaller markets. In 2009, the company opened 61 new stores, all but 5 of which were in the United States. The company also expand internationally in Q12010 by opening its first store in Mexico. <ref name=mexico/>

===Business Segments===

===Business Segments===

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Lowe's reports its sales in one general business segment which has 21 different categories of products: <ref name=segments>[http://sec.gov/Archives/edgar/data/60667/000006066709000036/exhibit13.htm LOW 2008 10-K, Exhibit 13, pg. 44]</ref>

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Lowe's reports its sales in one general business segment which has 21 different categories of products: <ref name=segments>[[stock:Lowe LOW 2008 10-K, Exhibit 13, pg. 44]]</ref>

In June 2009, main competitor to Lowe's, [[Home Depot (HD)|Home Depot]] claimed that the worst of the housing market fallout had already passed. <ref>[http://www.fool.com/investing/value/2009/06/11/home-depot-drinks-the-recovery-kool-aid.aspx Motley Fool "Home Depot Calls a Bottom" 11 June 2009]</ref> However, this does not mean that the home improvement companies like Lowe's will suddenly see higher sales or net income -- Lowe's had a 19% decrease in net income in 2009.<ref>[http://www.sec.gov/Archives/edgar/data/60667/000006066709000036/exhibit13.htm LOW 2008 10-K, Exhibit 13, pg. 12]</ref> Although the housing market might have bottomed out, the economy is still suffering from the recession. The household savings rate has reached a 15 year high <ref>[http://www.msnbc.msn.com/id/31564909/ns/business-stocks_and_economy/ MSNBC "Americans saving more, spending modestly" 26 June 2009]</ref> and the number of homes on the market due to foreclosures is very high. Homebuilders have to wait until foreclosed homes, which are selling at rock bottom prices, and for the economy to rebound before they see any increases in housing construction. In October 2009, home construction fell 10.6% from levels in September and was at its lowest point in six months. In addition, home construction in October 2009 was 30.7% lower than it was in October 2008<ref>[http://money.cnn.com/2009/11/18/real_estate/housing_starts_October/index.htm CNN Money "Home construction at lowest point in 6 months" 18 November 2009]</ref> In the following December, home construction fell an additional 4%. However, that month also saw a 10.9% increase in the number building permits, an indicator of future construction,<ref>[http://www.nytimes.com/2010/01/21/business/economy/21econ.html New York Times "Home Construction Down Sharply in December" 20 January 2010]</ref> which reach its highest level in a year and is perhaps a sign that the slow recovery is already beginning.

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In June 2009, main competitor to Lowe's, [[Home Depot (HD)|Home Depot]] claimed that the worst of the housing market fallout had already passed. <ref>[http://www.fool.com/investing/value/2009/06/11/home-depot-drinks-the-recovery-kool-aid.aspx Motley Fool "Home Depot Calls a Bottom" 11 June 2009]</ref> However, this does not mean that the home improvement companies like Lowe's will suddenly see higher sales or net income -- Lowe's had a 19% decrease in net income in 2009.<ref>[[stock:Lowe LOW 2008 10-K, Exhibit 13, pg. 12]]</ref> Although the housing market might have bottomed out, the economy is still suffering from the recession. The household savings rate has reached a 15 year high <ref>[http://www.msnbc.msn.com/id/31564909/ns/business-stocks_and_economy/ MSNBC "Americans saving more, spending modestly" 26 June 2009]</ref> and the number of homes on the market due to foreclosures is very high. Homebuilders have to wait until foreclosed homes, which are selling at rock bottom prices, and for the economy to rebound before they see any increases in housing construction. In October 2009, home construction fell 10.6% from levels in September and was at its lowest point in six months. In addition, home construction in October 2009 was 30.7% lower than it was in October 2008<ref>[http://money.cnn.com/2009/11/18/real_estate/housing_starts_October/index.htm CNN Money "Home construction at lowest point in 6 months" 18 November 2009]</ref> In the following December, home construction fell an additional 4%. However, that month also saw a 10.9% increase in the number building permits, an indicator of future construction,<ref>[http://www.nytimes.com/2010/01/21/business/economy/21econ.html New York Times "Home Construction Down Sharply in December" 20 January 2010]</ref> which reach its highest level in a year and is perhaps a sign that the slow recovery is already beginning.

In the past, a high correlation has existed between the rate of [[Residential Real Estate Prices|home purchases]] and buildings and interest rates. As interest rates fall, prospective home owners and builders can borrow money less expensively and therefore will be more likely to do so. When more homes are built and purchased, Lowe's sales to homebuilders and re-modelers increase. On the flip side, when interest rates rise, borrowing becomes more expensive and the number of building and home improvement projects decline, resulting in fewer sales for Lowe's. In addition, higher interest rates make home refinancing, a large source of funds for home improvement projects, more expensive.

In the past, a high correlation has existed between the rate of [[Residential Real Estate Prices|home purchases]] and buildings and interest rates. As interest rates fall, prospective home owners and builders can borrow money less expensively and therefore will be more likely to do so. When more homes are built and purchased, Lowe's sales to homebuilders and re-modelers increase. On the flip side, when interest rates rise, borrowing becomes more expensive and the number of building and home improvement projects decline, resulting in fewer sales for Lowe's. In addition, higher interest rates make home refinancing, a large source of funds for home improvement projects, more expensive.

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Since 2006 the [[U.S. Housing Market|housing market]] has been struggling as a result of the [[2007 Credit Crunch|credit crunch]] that began in 2007 in the financial industries with fallouts on [[Subprime lending|subprime]] mortage-backed securities. As a result, national home foreclosure rates have gone up dramatically, with the hardest hit places being the Southeast and Southwest. <ref>[http://www.housingzone.com/article/CA6663079.html Housing Zone "Rising Foreclosure Rate Restrains Housing Starts" 5 June 2009]</ref> The foreclosure rate in February 2009 was 30% higher than the rate in 2008 and in places like Nevada, one in every 70 homes recieved a foreclosure notice <ref>[http://www.cbsnews.com/stories/2009/03/12/national/main4861033.shtml CBS "Foreclosure Rate Up 30% From Last February" 12 March 2009]</ref> The more foreclosures there are, the more homes are on the market, which results in a decrease in demand for building new homes. Lowe's has struggled through this period seeing annual decreases in revenue and net income since 2006. In addition, same store sales have been even or negative in 2006, 2007, and 2008 at 0.0%, -5.1%, and -7.2% respectively. <ref name=comparable/>

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Since 2006 the [[U.S. Housing Market|housing market]] has been struggling as a result of the [[2007 Credit Crunch|credit crunch]] that began in 2007 in the financial industries with fallouts on [[Subprime lending|subprime]] mortage-backed securities. As a result, national home foreclosure rates have gone up dramatically, with the hardest hit places being the Southeast and Southwest. <ref>[http://www.housingzone.com/article/CA6663079.html Housing Zone "Rising Foreclosure Rate Restrains Housing Starts" 5 June 2009]</ref> The foreclosure rate in Q3 2009 was 5% higher than the rate in Q2 and 23% higher than the rate in Q3 2008. This meant that one in every 136 homes were in foreclosure nationwide, and in the hardest hit places like Nevada, one in every 23 homes recieved a foreclosure notice <ref>[http://money.cnn.com/2009/10/15/real_estate/foreclosure_crisis_deepens/ CNN Money "Foreclosures: 'Worst three months of all time'" 15 October 2009]</ref> The more foreclosures there are, the more homes are on the market, which results in a decrease in demand for building new homes. Lowe's has struggled through this period seeing annual decreases in revenue and net income since 2006. In addition, same store sales have been negative in 2007, 2008, and 2009 at -5.1%, -7.2%, and -6.7% respectively. <ref name=comparable/>

It should be noted that housing booms do not always occur when interest rates are low. This is especially true in the case of a geographic area housing boom. There are many reasons for such booms (e.g., a company may move to an area, providing a boon through new jobs creation). Because Lowe's has widespread locations throughout the U.S., they are in position to take advantage of such booms.

It should be noted that housing booms do not always occur when interest rates are low. This is especially true in the case of a geographic area housing boom. There are many reasons for such booms (e.g., a company may move to an area, providing a boon through new jobs creation). Because Lowe's has widespread locations throughout the U.S., they are in position to take advantage of such booms.

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*'''Domestic''':

*'''Domestic''':

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By the end of 2008, Lowe's was operating 1,638 stores in the United States, having opened 115 new stores during the 2008 fiscal year. <ref name=stores/>Approximately half of Lowe's retail stores are located in one of the top 100 markets in the US, which are comprise about two-thirds of total revenue in the home improvement market. Lowe's store expansion in the future focuses on expanding in the Northeast and West regions of the U.S. However, because of the turmoil of the [[U.S. Housing Market]] and reduced consumer spending due to the recession, Lowe's has drastically decreased its rate of expansion. The company only plans to open 60 to 70 new stores in 2009, compared to the 115 stores in 2008 and 149 stores opened in 2007. <ref name=stores/><ref>[http://www.marketwatch.com/news/story/story.aspx?guid=%7BBBBDE26D%2D7962%2D4444%2DBCFF%2D532B9A1D360F%7D&siteid=rss MarketWatch "Lowe's cuts new-store plan; is cautious on outlook" 24 Sept 2008]</ref>

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By the end of 2009, Lowe's was operating 1,710 stores in the United States, having opened 61 new stores during the 2009 fiscal year. <ref name=stores/>Approximately half of Lowe's retail stores are located in one of the top 100 markets in the US, which are comprise about two-thirds of total revenue in the home improvement market. Lowe's store expansion in the future focuses on expanding in the Northeast and West regions of the U.S. However, because of the turmoil of the [[U.S. Housing Market]] and reduced consumer spending due to the recession, Lowe's has drastically decreased its rate of expansion. The company only plans to open 40 to 45 new stores in 2010, compared to the 61 and 115 stores opened in 2009 and 2008 respectively. <ref name=stores/><ref>[http://www.reuters.com/article/idUSTRE57G26V20090817 Reuters "Lowe's curbs expansion as consumers pull back" 17 August 2009]</ref>

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Lowe's currently has two types of retail stores, a larger one for areas with higher demand and a smaller store type for areas with less demand. This lets Lowe's prevent building up excess inventory by matching an area's demand with the appropriately sized supply of products and services. Matching demands and cutting costs are essential for Lowe's because its main competitor Home Depot has 1,971 stores in the U.S and is competing for the same customers. <ref name=HDstores>[http://www.sec.gov/Archives/edgar/data/354950/000095014409002875/x17422e10vk.htm HD 2008 10-K, pg. 8 and 9]</ref>

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Lowe's currently has two types of retail stores, a larger one for areas with higher demand and a smaller store type for areas with less demand. This lets Lowe's prevent building up excess inventory by matching an area's demand with the appropriately sized supply of products and services. Matching demands and cutting costs are essential for Lowe's because its main competitor Home Depot has 1,976 stores in the U.S and is competing for the same customers. <ref name=HDstores>[[stock:Home_Depot_(HD)/Filing/10-K/2009/F1301349#104 | HD 2008 10-K, pg. 8 and 9]]</ref>

*'''International''':

*'''International''':

In addition to domestic expansion, Lowe's is starting to focus on expanding internationally as well. Home Depot already has a large presense outside of the US in countries like Canada, Mexico, and China. Not only do these markets provide a new customer basis and more sales, they also act as a buffer to the slumping US domestic economy. Lowe's sees international expansion as a means to increase revenue and keep up with Home Depot.

In addition to domestic expansion, Lowe's is starting to focus on expanding internationally as well. Home Depot already has a large presense outside of the US in countries like Canada, Mexico, and China. Not only do these markets provide a new customer basis and more sales, they also act as a buffer to the slumping US domestic economy. Lowe's sees international expansion as a means to increase revenue and keep up with Home Depot.

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Lowe's opened its first stores outside of the U.S. in Canada during FY2007 with seven stores in the greater Toronto area. In FY2008, the company opened five more stores in Canada, increasing its international stores to 11. Lowe's also has plans to venture into Mexico with three to five stores in and around Monterrey in 2009. <ref name=stores/>

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Lowe's opened its first stores outside of the U.S. in Canada during FY2007 with seven stores in the greater Toronto area. In FY2008, the company opened five more stores in Canada, increasing its international stores to 11. Lowe's made plans to venture into Mexico in 2009 with three to five stores in and around Monterrey. <ref name=stores/> The first of these stores opened in Q1 2010.

Home Depot, on the other hand, is already established outside of the United States with over 150 stores in Canada and 60 stores in Mexico. It is important to note that Home Depot's international stores generate less revenue per store than domestic stores. This differential is likely tied to the fundamentals of international markets (i.e., lower disposable incomes, lower average home prices). As such, Lowe's faces the risk of having lower overall store efficiency as it steps outside of the U.S .in the next few years.

Home Depot, on the other hand, is already established outside of the United States with over 150 stores in Canada and 60 stores in Mexico. It is important to note that Home Depot's international stores generate less revenue per store than domestic stores. This differential is likely tied to the fundamentals of international markets (i.e., lower disposable incomes, lower average home prices). As such, Lowe's faces the risk of having lower overall store efficiency as it steps outside of the U.S .in the next few years.

===Increased Installed Sales Due to Older Population===

===Increased Installed Sales Due to Older Population===

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One quickly growing contributor to revenue for Lowe's is their Installed Sales division. Through this division, the company provides installation services to customers who prefer the concept of do-it-for-me (DIFM) rather than do-it-yourself (DIY). Lowe's sells to DIFM customers products as well as home installation. For example, Lowe's installs the new flooring purchased in its retail stores. The company offers installation services in over 40 categories and has an association of over 10,000 professional installers nationwide. Sales from this division have increased at a compounded annual growth rate of approximately 22% since 2004 with segment revenue achieving 6% of net sales in 2008 (approximately $2.9 billion). <ref name=installed>[http://www.sec.gov/Archives/edgar/data/60667/000006066709000036/lowesform10k01302009.htm LOW 2008 10-K, Part 1, pg. 6]</ref>

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One quickly growing contributor to revenue for Lowe's is their Installed Sales division. Through this division, the company provides installation services to customers who prefer the concept of do-it-for-me (DIFM) rather than do-it-yourself (DIY). Lowe's sells to DIFM customers products as well as home installation. For example, Lowe's installs the new flooring purchased in its retail stores. The company offers installation services in over 40 categories and has an association of over 10,000 professional installers nationwide. Sales from this division have increased at a compounded annual growth rate of approximately 22% since 2004 with segment revenue achieving 6% of net sales in 2009 (approximately $2.9 billion). <ref name=installed>[[stock:Lowe%27s_Companies_%28LOW%29/Filing/10-K/2009/F1299627#part_i | LOW 2008 10-K, Part 1, pg. 6]]</ref>

As the demographics of the U.S. change, specifically [[Aging Baby Boomers|baby boomers getting older]], there will be an increased amount of demand for DIFM services. The 77 million baby boomers provide a growing market for Lowe's DIFM business line -- in 2005, the DIFM business increased by 20.5%.<ref>[http://money.cnn.com/2005/05/11/news/fortune500/boomers_difm/index.htm CNN Money "Baby Boomers: Do-It-For-Me generation" 11 May 2005]</ref> This is good for Lowe's because they reap additional revenue in this segment from installation charges that they do not accrue from DIY (do-it-yourself) customers.

As the demographics of the U.S. change, specifically [[Aging Baby Boomers|baby boomers getting older]], there will be an increased amount of demand for DIFM services. The 77 million baby boomers provide a growing market for Lowe's DIFM business line -- in 2005, the DIFM business increased by 20.5%.<ref>[http://money.cnn.com/2005/05/11/news/fortune500/boomers_difm/index.htm CNN Money "Baby Boomers: Do-It-For-Me generation" 11 May 2005]</ref> This is good for Lowe's because they reap additional revenue in this segment from installation charges that they do not accrue from DIY (do-it-yourself) customers.

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* When craftsmen become accustomed to one type/style of tool they generally replace that tool with one of the same style/type because of the utility gained from saving money, time or just from personal preferences. This is an example of [[customer lock-in]], a theory that says a customer has to rely on a particular vendor for his needs in order to avoid a high increase in costs.

* When craftsmen become accustomed to one type/style of tool they generally replace that tool with one of the same style/type because of the utility gained from saving money, time or just from personal preferences. This is an example of [[customer lock-in]], a theory that says a customer has to rely on a particular vendor for his needs in order to avoid a high increase in costs.

September 2007 saw Lowe's become the subject of an online protest site lowes-sucks.com (no longer active) complaining about the quality of work by contracted installers. Whilst the underlying complaint (about the quality of a fence installation) seems trivial, the issue has snowballed and become more about Lowe's complaint handling and legal responses, rather than their quality of work. All this received considerable media interest, and is an example of the often unexpected side of [[The Internet Impact]] on companies.

==Competition==

==Competition==

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Lowe's and Home Depot are by far the most known of the home improvement retail industry, but together they make up only about 18% of the estimated $725 billion home improvement market, which includes pure product demand as well as installation labor demand. The rest is distributed between other "big-box" retailers such as [[Wal-Mart Stores (WMT)]], smaller hardware store chains, construction firms, and other small businesses.

Lowe's and Home Depot are by far the most known of the home improvement retail industry, but together they make up only about 18% of the estimated $725 billion home improvement market, which includes pure product demand as well as installation labor demand. The rest is distributed between other "big-box" retailers such as [[Wal-Mart Stores (WMT)]], smaller hardware store chains, construction firms, and other small businesses.

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Lowe's ranks behind Home Depot in terms of overall revenue--$71.3 billion vs $48.2 billion in 2008. <ref name=mainfinancial/><ref name=HDmainfinancial/>Despite this, Lowe's has been catching up with and even exceeding Home Depot across several measures while trailing in the international markets:

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Lowe's ranks behind Home Depot in terms of overall revenue--$47.2 billion vs $66.2 billion in 2009.<ref name=mainfinancial/><ref name=HDmainfinancial/> Despite this, Lowe's has been catching up with and even exceeding Home Depot across several measures while trailing in the international markets:

*'''Same Store Sales Growth''': Lowe's has consistently been ahead of Home Depot in same store sales growth since 2004. Same store sales growth lends the best comparison of sales growth between the two companies by looking at the same stores year over year for both companies. By doing this it does not allow new store openings to affect the comparison. In 2009, same store sales of Home Depot decreased by 6.6% <ref name=HDmainfinancial/> whereas same stores sales of Lowe's decreased only by 6.7%. <ref name=mainfinancial/>

*'''Same Store Sales Growth''': Lowe's has consistently been ahead of Home Depot in same store sales growth since 2004. Same store sales growth lends the best comparison of sales growth between the two companies by looking at the same stores year over year for both companies. By doing this it does not allow new store openings to affect the comparison. In 2008, same store sales of HD decreased by 8.7% <ref name=HDmainfinancial/> whereas same stores sales of LOW decreased only by 7.2%. <ref name=mainfinancial/>

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*'''Operating Margin''': Lowe's had been behind Home Depot in terms of operating margins for several years until 2006 when Lowe's won a slight advantage over Home Depot. However, Home Depot surpassed Lowe's again in 2007. Home Depot's operating margin was 7.3% compared to Lowe's 6.0% mark in 2009. <ref name=mainfinancial/>

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*'''Operating Margin''': Lowe's had been behind Home Depot in terms of operating margins for several years until 2006 when Lowe's won a slight advantage over Home Depot. However, Home Depot surpassed Lowe's again in 2007. Home Depot's operating margin fell to 6.1% compared to Lowe's 7.3% mark in 2008. <ref name=LOWGoogle/>

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*'''International Markets''': Home Depot has 268 stores <ref name=HDstores/>outside of the US (mostly in Canada and Mexico) which is six more stores than it had in 2008. On the other hand, at the end of 2009, Lowe's had a total of 16 stores outside the United States, all of which are in Canada.<ref name=stores/> Lowe's hopes to pursue international expansion to catch up to Home Depot's global sales by opening new stores in Mexico -- the first of which were opened in Q1 2010.

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*'''International Markets''': Home Depot has 262 stores <ref name=HDstores/>outside of the US (mostly in Canada and Mexico) which is 19 more stores than it had in 2008. On the other hand, Lowe's expanded internationally with just 11 new stores in Canada in 2008. <ref name=stores/> Lowe's hopes to continue this expansion to catch up to Home Depot's global sales by opening new stores in Mexico in 2009.

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One key driver of the difference in operating performance is Lowe's store environment, which is often noted to be more more customer friendly than Home Depot's. Consumers wanting less of a "warehouse style" home improvement retailer often choose Lowe's over Home Depot.

One key driver of the difference in operating performance is Lowe's store environment, which is often noted to be more more customer friendly than Home Depot's. Consumers wanting less of a "warehouse style" home improvement retailer often choose Lowe's over Home Depot.

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In light of the housing market troubles and the economic recession, Lowe's has fared comparatively better than [[Home Depot (HD)]]. In 2008, Home Depot saw sales and net income drop 7.8% and 48.6% respectively from 2007, <ref name=HDGoogle/> while Lowe's only suffered minor losses at 0.1% and 22% respectively. <ref name=LOWGoogle/>

===Smaller Competitors===

===Smaller Competitors===

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One example of a small competitor is [[Builders FirstSource (BLDR)]], a company that makes and sells structural and related building products for residential new construction. The company is based in the United States and operates in the United States.<ref name=BLDRGoogle>[http://www.google.com/finance?q=NASDAQ:BLDR Google Finance: BLDR Overview]</ref>

One example of a small competitor is [[Builders FirstSource (BLDR)]], a company that makes and sells structural and related building products for residential new construction. The company is based in the United States and operates in the United States.<ref name=BLDRGoogle>[http://www.google.com/finance?q=NASDAQ:BLDR Google Finance: BLDR Overview]</ref>

Revision as of 20:07, January 4, 2012

Lowe's Companies (NYSE: LOW) is the second largest home improvement retailer in the world and one of the top ten largest retailers in the U.S. with $47.2 billion in sales in 2009. [1][2] Lowe's offers products and services across twenty categories in their home improvement stores, ranging from kitchen appliances to lumber to gardening tools. The company ranks second in home improvement retailing to Home Depot (HD), which had total sales of $66.2 billion in 2009 -- nearly one-and-a-half times that of Lowe's. [3] Home Depot has has held the upper hand against Lowe's since 2005 in terms of sales and net income -- in 2009, Home Depot's net income was $2.7 billion, one-and-a-half times greater than Lowe's $1.8 billion.

Like all home improvement retailers, Lowe's is very vulnerable to interest rates and the housing market slowdown. The subprime mortgage crisis in the financial industry has also been a large factor behind Lowe's struggles. In 2009, even though Lowe's net sales decreased 2% from 2008 sales, net income decreased 18.8% to $1.8 billion and same store sales decreased 6.7% for the year.[1][4] In addition, at of the end of fiscal 2009, Lowe's operated over 1,710 stores in the United States and Canada -- all but 16 of the stores were located in the US, [5] which gives Lowe's greater exposure to the struggling domestic US market. The economic downturn has also caused the company to slow down store expansion -- Lowe's only plans to open 40 to 45 new stores in 2010 compared to the 61 and 115 stores it opened in 2009 and 2008 respectively.[5] Home Depot on the other hand operates 262 stores internationally and has stores in China, which act as a buffer to the domestic market. [6] Lowe's expand internationally in Q12010 by opening its first store in Mexico.[7]

Company Overview

Lowe's started as a single hardware store in North Carolina in 1946 and since then has grown to the second largest home improvement retailer in the world behind Home Depot. Today, the company makes money in several different key areas:

Stores and Products

Lowe's provides a wide range of home building supplies (about 40,000 products per store) and services to its target customers. [8] The company sells national brand name merchandise ranging from Whirlpool to John Deere and proprietary brands exclusive to Lowe's such as Kobalt and Harbor Breeze.

In 2009, the company operated 1,710 stores in the United States and Canada -- all but 16 of the stores were located in the United States. Most retail outlets are big-box stores (averaging around 110,000 square feet of retail space) which are used in large markets, and some are smaller 94,000 square-foot stores used for smaller markets. In 2009, the company opened 61 new stores, all but 5 of which were in the United States. The company also expand internationally in Q12010 by opening its first store in Mexico. [7]

Business Segments

Lowe's reports its sales in one general business segment which has 21 different categories of products: [9]

Appliances: 9% of net sales

Lumber: 8% of net sales

Paint: 7% of net sales

Flooring: 7% of net sales

Building Materials: 6% of net sales

Millwork: 6% of net sales

Lawn and Landscape Products: 5% of net sales

Fashion Plumbing: 5% of net sales

Hardware: 5% of net sales

Lighting: 5% of net sales

Tools: 5% of net sales

Seasonal Living: 5% of net sales

Rough Plumbing: 4% of net sales

Outdoor Power Equipment: 4% of net sales

Cabinets and Countertops: 4% of net sales

Nursery: 4% of net sales

Rough Electrical: 3% of net sales

Home Environment: 3% of net sales

Home Organization: 2% of net sales

Windows and Walls: 2% of net sales

Other: 1% of net sales

Sales

Lowe's uses four methods to make sales:

In Store Sales: Lowe's sells home improvement products in twenty different categories in its stores. In 2009, Lowe's top five selling categories accounted for 37% of total revenue.

Business Growth

Lowe's net income dropped 18.8% in 2009 from $2.2 billion in 2008 to $1.8 billion in 2009. The company attributes the large decrease to the effect the housing crisis had on the home improvement industry and economic downturn which made consumers cut back on spending.

Net sales fell 2.1% to $47.2 billion. Lack of growth was reflected by a comparable store sale decrease of 6.7% for the year. However the company did have an increase in total customer transactions, which was up 2.8% from 2008, as a result of the store expansion program. In addition Lowe's also had strong building materials sales as a result of a higher demand for hurricane-related projects.

Operating margin for the year was 6.0% of net sales compared to 7.3% in 2008, a 130 bps decrease as a result of higher operating expenses. Operating income for the year was $2.8 billion.

There was an 6.7% decrease in comparable store sales in 2009, compared to a decrease of 7.8% in 2008.

Lowe's only opened 61 stores in 2009, compared to 115 stores in 2008, 149 in 2007, and 151 in 2006. The company expects to open between 40 and 45 stores in 2010.

Trends and Forces

Lowe's Sales Face Slow Recovery After Housing Market Reaches Bottom

In June 2009, main competitor to Lowe's, Home Depot claimed that the worst of the housing market fallout had already passed. [10] However, this does not mean that the home improvement companies like Lowe's will suddenly see higher sales or net income -- Lowe's had a 19% decrease in net income in 2009.[11] Although the housing market might have bottomed out, the economy is still suffering from the recession. The household savings rate has reached a 15 year high [12] and the number of homes on the market due to foreclosures is very high. Homebuilders have to wait until foreclosed homes, which are selling at rock bottom prices, and for the economy to rebound before they see any increases in housing construction. In October 2009, home construction fell 10.6% from levels in September and was at its lowest point in six months. In addition, home construction in October 2009 was 30.7% lower than it was in October 2008[13] In the following December, home construction fell an additional 4%. However, that month also saw a 10.9% increase in the number building permits, an indicator of future construction,[14] which reach its highest level in a year and is perhaps a sign that the slow recovery is already beginning.

Changes in Housing/Interest Rates Affect Homebuilders which Lowe's Relies On

To read a more detailed discussion of how interest rates affect housing, see alsoInterest Rates.

In the past, a high correlation has existed between the rate of home purchases and buildings and interest rates. As interest rates fall, prospective home owners and builders can borrow money less expensively and therefore will be more likely to do so. When more homes are built and purchased, Lowe's sales to homebuilders and re-modelers increase. On the flip side, when interest rates rise, borrowing becomes more expensive and the number of building and home improvement projects decline, resulting in fewer sales for Lowe's. In addition, higher interest rates make home refinancing, a large source of funds for home improvement projects, more expensive.

Since 2006 the housing market has been struggling as a result of the credit crunch that began in 2007 in the financial industries with fallouts on subprime mortage-backed securities. As a result, national home foreclosure rates have gone up dramatically, with the hardest hit places being the Southeast and Southwest. [15] The foreclosure rate in Q3 2009 was 5% higher than the rate in Q2 and 23% higher than the rate in Q3 2008. This meant that one in every 136 homes were in foreclosure nationwide, and in the hardest hit places like Nevada, one in every 23 homes recieved a foreclosure notice [16] The more foreclosures there are, the more homes are on the market, which results in a decrease in demand for building new homes. Lowe's has struggled through this period seeing annual decreases in revenue and net income since 2006. In addition, same store sales have been negative in 2007, 2008, and 2009 at -5.1%, -7.2%, and -6.7% respectively. [4]

It should be noted that housing booms do not always occur when interest rates are low. This is especially true in the case of a geographic area housing boom. There are many reasons for such booms (e.g., a company may move to an area, providing a boon through new jobs creation). Because Lowe's has widespread locations throughout the U.S., they are in position to take advantage of such booms.

By the end of 2009, Lowe's was operating 1,710 stores in the United States, having opened 61 new stores during the 2009 fiscal year. [5]Approximately half of Lowe's retail stores are located in one of the top 100 markets in the US, which are comprise about two-thirds of total revenue in the home improvement market. Lowe's store expansion in the future focuses on expanding in the Northeast and West regions of the U.S. However, because of the turmoil of the U.S. Housing Market and reduced consumer spending due to the recession, Lowe's has drastically decreased its rate of expansion. The company only plans to open 40 to 45 new stores in 2010, compared to the 61 and 115 stores opened in 2009 and 2008 respectively. [5][17]

Lowe's currently has two types of retail stores, a larger one for areas with higher demand and a smaller store type for areas with less demand. This lets Lowe's prevent building up excess inventory by matching an area's demand with the appropriately sized supply of products and services. Matching demands and cutting costs are essential for Lowe's because its main competitor Home Depot has 1,976 stores in the U.S and is competing for the same customers. [18]

International:

In addition to domestic expansion, Lowe's is starting to focus on expanding internationally as well. Home Depot already has a large presense outside of the US in countries like Canada, Mexico, and China. Not only do these markets provide a new customer basis and more sales, they also act as a buffer to the slumping US domestic economy. Lowe's sees international expansion as a means to increase revenue and keep up with Home Depot.

Lowe's opened its first stores outside of the U.S. in Canada during FY2007 with seven stores in the greater Toronto area. In FY2008, the company opened five more stores in Canada, increasing its international stores to 11. Lowe's made plans to venture into Mexico in 2009 with three to five stores in and around Monterrey. [5] The first of these stores opened in Q1 2010.

Home Depot, on the other hand, is already established outside of the United States with over 150 stores in Canada and 60 stores in Mexico. It is important to note that Home Depot's international stores generate less revenue per store than domestic stores. This differential is likely tied to the fundamentals of international markets (i.e., lower disposable incomes, lower average home prices). As such, Lowe's faces the risk of having lower overall store efficiency as it steps outside of the U.S .in the next few years.

Increased Installed Sales Due to Older Population

One quickly growing contributor to revenue for Lowe's is their Installed Sales division. Through this division, the company provides installation services to customers who prefer the concept of do-it-for-me (DIFM) rather than do-it-yourself (DIY). Lowe's sells to DIFM customers products as well as home installation. For example, Lowe's installs the new flooring purchased in its retail stores. The company offers installation services in over 40 categories and has an association of over 10,000 professional installers nationwide. Sales from this division have increased at a compounded annual growth rate of approximately 22% since 2004 with segment revenue achieving 6% of net sales in 2009 (approximately $2.9 billion). [19]

As the demographics of the U.S. change, specifically baby boomers getting older, there will be an increased amount of demand for DIFM services. The 77 million baby boomers provide a growing market for Lowe's DIFM business line -- in 2005, the DIFM business increased by 20.5%.[20] This is good for Lowe's because they reap additional revenue in this segment from installation charges that they do not accrue from DIY (do-it-yourself) customers.

Private and Proprietary Brands Give Lowe's an Edge

Each Lowe's store stocks proprietary brands exclusively sold by Lowe's and national brand name items sold by other retailers and suppliers. Some notable brands unique to Lowe's include: Premier Living, Kobalt, and Portfolio. The contracts that give Lowe's exclusive rights to sell certain brands generate dual value, especially in regards to the professional customer base.

When craftsmen become accustomed to one type/style of tool they generally replace that tool with one of the same style/type because of the utility gained from saving money, time or just from personal preferences. This is an example of customer lock-in, a theory that says a customer has to rely on a particular vendor for his needs in order to avoid a high increase in costs.

Competition

Lowe's vs. Home Depot

Lowe's is in second place behind Home Depot (HD) in a two horse race in the home improvement retail industry (both are among the top 10 overall retailers in the U.S.). To illustrate the competition between the two companies, nearly a quarter of Lowe's retail stores are located within 10 miles of a competing Home Depot retail store. [21]

Lowe's and Home Depot are by far the most known of the home improvement retail industry, but together they make up only about 18% of the estimated $725 billion home improvement market, which includes pure product demand as well as installation labor demand. The rest is distributed between other "big-box" retailers such as Wal-Mart Stores (WMT), smaller hardware store chains, construction firms, and other small businesses.

Lowe's ranks behind Home Depot in terms of overall revenue--$47.2 billion vs $66.2 billion in 2009.[1][3] Despite this, Lowe's has been catching up with and even exceeding Home Depot across several measures while trailing in the international markets:

Same Store Sales Growth: Lowe's has consistently been ahead of Home Depot in same store sales growth since 2004. Same store sales growth lends the best comparison of sales growth between the two companies by looking at the same stores year over year for both companies. By doing this it does not allow new store openings to affect the comparison. In 2009, same store sales of Home Depot decreased by 6.6% [3] whereas same stores sales of Lowe's decreased only by 6.7%. [1]

Operating Margin: Lowe's had been behind Home Depot in terms of operating margins for several years until 2006 when Lowe's won a slight advantage over Home Depot. However, Home Depot surpassed Lowe's again in 2007. Home Depot's operating margin was 7.3% compared to Lowe's 6.0% mark in 2009. [1]

International Markets: Home Depot has 268 stores [18]outside of the US (mostly in Canada and Mexico) which is six more stores than it had in 2008. On the other hand, at the end of 2009, Lowe's had a total of 16 stores outside the United States, all of which are in Canada.[5] Lowe's hopes to pursue international expansion to catch up to Home Depot's global sales by opening new stores in Mexico -- the first of which were opened in Q1 2010.

One key driver of the difference in operating performance is Lowe's store environment, which is often noted to be more more customer friendly than Home Depot's. Consumers wanting less of a "warehouse style" home improvement retailer often choose Lowe's over Home Depot.

Smaller Competitors

Lowe's also faces competition from smaller independent mom & pop stores. Although these stores usually cannot match the prices of the industry giants Home Depot or Lowe's, they make up for higher prices with customer care, tradition, and perhaps convenience. [22] In addition, the presence of big companies like Lowe's and Home Depot in some areas has even caused customers to boycott the giant firm and to shop at local businesses. [23] The advantage that Lowe's has against these smaller competitors is that they stand a better chance at outlasting the economic downturn and in the mean time attracting old customers of fallen businesses.

One example of a small competitor is Builders FirstSource (BLDR), a company that makes and sells structural and related building products for residential new construction. The company is based in the United States and operates in the United States.[24]